First Financial Bankshares, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are primarily with December 31, 2014 and Q1 2014. The Texas-based financial holding company operates a full-service commercial bank and related trust and financial businesses, with 62 banking centers in Texas.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparison |
|---|---|---|
| Interest income | $52.1 million | $48.2 million in Q1 2014 |
| Net interest income | $51.1 million GAAP; $56.3 million tax-equivalent | $47.2 million GAAP; $51.8 million tax-equivalent in Q1 2014 |
| Net interest margin | 4.11% | 4.32% in Q1 2014, down 21 basis points |
| Noninterest income / expense | $15.9 million / $33.9 million | $16.4 million / $32.4 million in Q1 2014 |
| Provision for loan losses | $1.29 million | $1.69 million in Q1 2014 |
| Net earnings / diluted EPS | $24.0 million / $0.37 | $22.3 million / $0.35 in Q1 2014 |
| Return on average assets / equity | 1.64% / 14.00% | 1.74% / 15.02% in Q1 2014 |
| Efficiency ratio | 47.01% | 47.57% in Q1 2014 |
| Total assets | $6.03 billion | $5.85 billion at year-end 2014; $5.28 billion at March 31, 2014 |
| Loans held for investment | $2.93 billion | Down $0.7 million from year-end; $2.69 billion at March 31, 2014 |
| Total deposits | $4.84 billion | $4.75 billion at year-end; $4.23 billion at March 31, 2014 |
| Cash and cash equivalents | $166.0 million | Down from $253.5 million at year-end |
| Short-term borrowings | $401.9 million | $367.1 million at year-end |
| Shareholders’ equity | $706.2 million; 11.72% of assets | $681.5 million at year-end; 11.68% of assets at March 31, 2014 |
Operating cash flow was $40.4 million, versus $43.4 million in Q1 2014. Investing activities used $241.2 million, mainly reflecting $294.5 million of available-for-sale securities purchases. Financing activities provided $113.3 million, including deposit growth and higher short-term borrowings. Dividends were $0.14 per share for the quarter.
Regulatory capital ratios at March 31, 2015 were 17.26% total risk-based capital, 16.15% Tier 1 risk-based capital and 9.88% Tier 1 leverage for the company. Management reported the company and bank above required minimums. Ratios use Basel III rules at March 31, 2015, versus Basel I at year-end 2014.
Material changes and operating drivers
- Net earnings rose 7.44% year over year, supported by higher average earning assets and tax-equivalent net interest income, partly offset by lower asset yields and reduced noninterest income.
- Average earning assets increased $695.1 million year over year, including growth in average loans and taxable and tax-exempt securities. The yield on earning assets fell 23 basis points; the rate paid on interest-bearing liabilities fell 2 basis points.
- Noninterest income declined $0.5 million. Higher trust, card-related and mortgage-operation fees were offset by lower gains on foreclosed asset sales and the absence of a $0.6 million bank-owned life insurance settlement gain recorded in Q1 2014.
- Noninterest expense increased $1.5 million, or 4.61%, including higher staffing and acquisition-related legal costs.
- Nonperforming, past-due, restructured loans and foreclosed assets totaled $20.4 million, down from $27.6 million a year earlier and $21.7 million at year-end. The allowance was $37.8 million, or 1.29% of loans. Annualized net charge-offs were 0.04% of average loans versus 0.14% in Q1 2014.
- Available-for-sale securities totaled $2.69 billion at fair value. Net-of-tax unrealized gains included in equity were $58.9 million, versus $28.7 million a year earlier. The company reported $2.1 million of gross unrealized losses at quarter-end and considered them temporary, principally related to interest rates.
Outlook, risks and other notable items
- No specific earnings or revenue guidance was provided. Management expected low interest rates to continue putting downward pressure on net interest margin. Its rate simulation estimated net interest income changes over 12 months of +0.79% and +0.71% under +100- and +200-basis-point scenarios, and -2.73% under a -50-basis-point scenario; management cautioned that actual results may differ materially.
- Management identified credit quality and the allowance for loan losses, securities valuation, local economic conditions, employment, interest rates, oil and gas prices, drought, deposit gathering, liquidity, regulation and acquisition integration among key uncertainties. Direct oil and gas exposure was about 3% of loans; management cited related nonperforming and classified assets as a reason for continued loan-loss provisioning.
- On April 1, 2015, the company announced an agreement to acquire FBC Bancshares and First Bank, N.A. for an expected stock purchase price of approximately $59 million, subject to regulatory and shareholder approval, with closing expected at the end of Q2 2015. On April 8, it announced a $1.9 million cash purchase of 4Trust Mortgage, expected to close in May.
- After quarter-end, shareholders approved an increase in authorized common shares to 120 million. The board declared a $0.16-per-share dividend payable July 1, 2015. No shares had been repurchased under the existing authorization through March 31.
- The company elected to continue excluding most accumulated other comprehensive income from regulatory capital calculations. Management reported effective disclosure controls; no material pending legal proceedings or material changes to previously reported risk factors were disclosed.
- The quarter’s interim results are not necessarily indicative of full-year performance. Management cited seasonality, credit quality, economic conditions, interest rates and regulatory changes as factors that could affect results. The filing describes no material contingencies beyond ordinary-course matters.
Important facts for investors to verify
- Whether the announced bank and mortgage acquisitions received approvals, closed as expected and met purchase-price and integration assumptions.
- Whether margin pressure continues and how loan and securities growth, funding costs and interest-rate changes affect net interest income.
- Trends in criticized, nonaccrual and past-due loans, particularly real estate and oil-and-gas-related exposures, and whether the allowance remains adequate.
- The composition, duration and valuation sensitivity of the securities portfolio, including the effect of interest-rate changes on unrealized gains and regulatory capital.
- Liquidity and funding developments, including the use of short-term borrowings, pledged securities and available credit facilities, as well as the terms and renewal of the $25 million parent-company line maturing June 30, 2015.